Hotel Research
UK Serviced Apartment Market 2008
Park Plaza County Hall, London Grosvenor Apartments, London
“Branding will be key to raising the profile and
appeal of serviced apartments in the UK, opening
the sector up to new sources of demand and driving
further expansion” Adrian Archer, Hotel & Leisure Valuation
Increased adoption of tourist board grading will The ability of operators to capture corporate
help bring some uniformity. This has the potential demand from the emerging economies of China
to bolster demand from the leisure sector. and India, plus that from leisure guests, may
counteract any fall in demand from US corporates.
Management agreements have been key to
serviced apartment expansion in the UK, and will Branding is key to raising the profile of serviced
continue to be so. apartments and widen its demand base beyond the
corporate market. This is particularly important
Income return continues to outperform the private outside of London.
residential rented sector. We forecast between 5%
and 5.5% returns in 2008. Serviced apartments offer opportunities to
developers, but issues such as licensing, location,
The continued slowdown in the US economy may unit mix and fit out are all important considerations
have implications for serviced apartment demand in to ensure success. As a result securing an
the UK. operator at an early stage in the development
process may be key in enhancing value.
Current Supply
Serviced apartments are starting to make good inroads assessment will help bring some uniformity and
into the hospitality market in the UK. Central London improve confidence in the sector.
continues to be the core market based on its position
as a major international financial centre. But Average Rack Rates per night
operations have started to appear in other UK cities.
This has been driven on the back of the increase seen
in city centre flat development and regional economic 1 bed apartment
£200
growth.
£180
This report focuses on the supply of serviced £160
apartments in central London, Birmingham, Bristol, £140
Manchester, Leeds, Cardiff and Edinburgh. The £120
analysis is based on those buildings/operators with 10
£100
or more units in a given city centre.
£80
Current supply in Central London stands at just over £60
5,200 units with an average 45 units per £40
building/operation. Outside of London, Manchester £20
has the largest supply with 338 units. The presence of £0
a number of large blocks pushes average units per Manchester London Edinburgh Leeds Birmingham Cardiff Bristol
building to 56. Cardiff has one of the smallest markets
with only 42 units. As with all these markets there are
a number of single stand alone units offered, meaning Source: Savills
that total supply is larger than that detailed here.
Operators
Current supply The Central London market has been the gateway for
a number of the main international brands to enter the
Average units per
Units UK market. The Ascott Group, with their Citadines
bldg
brand, is the largest single operator with approximately
Central London 5,234 45 14% of total unit supply in six locations. Other
Manchester 338 56 international players include Bridgestreet, Fraser
Serviced Residences, Cheval and Oakwood,
Birmingham 258 32 accounting for a further 24% of supply. A number of
Leeds 143 36 hotel brands are also offering serviced apartments
either as part of their hotel offerings or as stand alone
Bristol 125 31 operations. These include Intercontinental, Marriott,
Edinburgh 207 19 Ramada, Best Western, Park Plaza, Como Hotels &
Resorts and Taj Hotels.
Cardiff 42 21
Source: Savills As yet there would appear to be little movement of the
key operators seen in London out to other regional
In London the expansion of supply has been focused
cities. Bridgestreet is one example with operations
on those areas closest to the City. This is in line with
outside London, together with Ascott who are opening
the fact that corporates form the bulk of the client base
a Citadines branded operation in Edinburgh in 2009.
and prefer to be close to their place of work.
While few key London operators are found in other UK
When it comes to average rack rates per night
cities this is not to say supply outside London is
Manchester seeks to achieve the highest rate at £188
dominated purely by local operators. Prem Group and
per night followed by Central London with £181. This
SACO have a good regional spread across the UK
is a reflection of grading. In Central London supply is
despite not operating in central London (SACO do
dominated by economy and mid-market units
market a number of operations in Central London).
accounting for 80% of unit supply. In contrast supply
The common operating profile across the regional
in the regional cities, particularly in Manchester, tends
cities are of small local single building owners and
to be focused at the top end of the market.
management operators controlling stand alone units.
Grading of serviced apartments has started to be
A number of new operators are looking to enter the UK
standardised. As of last year there was no standard
market. Intercontinental with their Staybridge suites, a
measure of quality but a number of operators have had
well established brand name in the US, are one. They
their offerings assessed through the appropriate
already have an operation in Liverpool with others
national tourist boards. Self certification continues to
planned for Central London, Brentford, Birmingham,
be the most common grading system. But it is
Newcastle and Glasgow. Korman Communities is
believed that the increased adoption of tourist board
UK Serviced Apartment Market report 2008 2
Investment
another US brand also hoping to enter the UK market. This out-performance has been a common feature of
It has been reported that they have teamed up with serviced apartments. Average income return per
Blackrock and are looking for opportunities. annum over the last 3 years has averaged 4.4%
compared to 3.7% for the PRS. This out-performance
is driven by the nature of the serviced apartment
Management agreements market as it is focused on short term lets charging a
The use of management agreements has been one of premium over that for standard residential lettings.
the key ways operators have grown their business, The branding of operators and their associated
facilitating supply expansion in the UK. marketing, which can reduce vacancy periods, has
also been key in enhancing incomes.
The standard management agreement structure is
similar to that of a hotel management contract. The We suspect that serviced apartments continued to see
main difference is that they tend to be for shorter income return out-performance in 2007 over the
periods of approximately 10 years. There is also an mainstream residential sector (PRS) of approximately
option to terminate any time after the fifth year with 90 5%. Our forecast for 2008 is that this out-performance
days notice. Automatic extensions can also be will continue, with similar returns of between 5% and
incorporated, which can be terminated by either party 5.5%.
with a stipulated notice period. The operators
obligations tend to cover the appearance of the Serviced apartments investment performance
property, maintenance of the business, standards of
the operation and quality of service. They will also be
responsible for repairs and maintenance of the 2005 2006 2007 forecast 2008 forecast
7%
property and fixtures & fittings. For this the operator
will charge a management fee (normally 3% of total 6%
revenue and 10% of Gross Operating Profit). This can 5%
also be subject to performance clauses. Other
4%
conditions stipulated in the contract can cover issues
related to other properties the owner may want to 3%
operate as serviced apartments. Performance testing 2%
is also common and allows the owner to terminate the
1%
agreement based on poor revenue performance
(excluding general downturn in the serviced apartment 0%
market). -1%
-2%
The use of management agreements continue to be Total Return Income Return Capital Growth
the standard method operators use to extend their
portfolio. It allows them to increase the size of their
inventory at relatively low risk and provides a certain Source: IPD; Savills
degree of flexibility as opposed to purchasing. The
benefits for a building/unit owner is that their units are Despite the past out-performance of income returns,
operated under a recognised brand name enhancing total returns have tended to under-perform the
occupancy and returns. standard residential investment sector. While total
returns in the PRS doubled in 2006 to 16.8%, driven
by a 12.3% increase in capital values, serviced
Investment apartments only saw total returns of 4.4%.
Serviced apartments form a small part of the IPD
(Investment Property Databank) portfolio. As of This under-performance comes down to how serviced
December 2006 87 serviced apartment units, with an apartments are valued. Serviced apartments are
estimated Capital value of £13.4m, were covered by valued as trading entities, in contrast the private rented
IPD. While they are associated with the hotel sector investment sector is valued at a discount to open
and valued as trading entities, the fact that they are in market residential values. This means that the capital
essence classed as residential properties means that value growth seen in the residential market has
they are benchmarked against residential investment translated through to its investment sector. In contrast
performance. serviced apartment capital values fell by -0.9% in
2006. This fall is probably a reflection of yields moving
The IPD results for 2007 are not yet available. In 2006 out in response to the sharp 10.8% uplift in capital
the serviced apartment sector, as recorded by IPD, values seen in 2004. For example, 2005 also saw
saw a fall in total returns of 150 basis points on that some softening of yields as capital value growth was a
reported in 2005. This was on the back of a fall in marginal 1%.
capital values of -0.9%. In contrast income return was
up 40 basis points to 5.3% outperforming the 3.5%
seen in the private rented sector (PRS).
UK Serviced Apartment Market report 2008 3
Demand
We expect that the 2007 IPD results will report some Business Visitors to UK
bounce back in yields. This will be driven by the
strong growth seen in residential values in London North America Europe Other Countries
where the majority of serviced apartment stock is held 10,000
(London residential values saw a 12.8% uplift in 2007
Number of overseas business visitors (000s)
9,000
up from 11.3% in 2006). Our forecast for 2007 is that
total returns will be in the region of 6%. For 2008 we 8,000
expect total returns to be marginally down on 2007 at 7,000
5.5% due to the forecasted slowdown in UK house
6,000
price growth.
5,000
Government tax changes in 2008 may have potential 4,000
impacts on the investment market for serviced
3,000
apartments. The abolition of taper relief on Capital
Gains Tax from April this year may lead to more assets 2,000
being disposed leading up to April. This is as investors 1,000
try to avoid the introduction of the flat 18%, up from the
previous 10% applicable to 40% taxpayers. This issue 0
99 00 01 02 03 04 05 06 07e 08f 09f
is covered in more detail in our 2008 UK Hotel
Investment report. Source: ONS; Savills
As well as these tax implications future investment It is the continued growth in the number of business
performance will be dependent on occupier demand. visitors coming from outside the US and Europe which
Traditionally this demand has come from the US, as a may insulate the UK from any potential fall in US
result there are concerns to the extent the continued demand. For 2008 and 2009 we forecast that these
slowdown in the US economy will have on the UK business visitor numbers will be up approximately 7%
serviced apartment market. per annum.
This increase in business visitors from ‘other countries’
Future demand ties in with the comments of one international serviced
For Central London it has been the banking/financial apartment operator. This operator noted that they
and insurance sectors that have been the principal expected future growth of their business to come from
users of serviced apartments. But corporate guests outside the US, namely from corporates from India and
are not exclusive to these sectors. Operators have China. Both these economies have experienced
noted repeat business also coming from law firms, strong growth and this is forecasted to continue. On
construction companies and manufacturers. But it is the back of this a number of Indian and Chinese
multi-national corporations that tend to be primary companies have started to move into the UK seeing it
users of serviced apartments. as a strong platform in order to enter European
markets.
One of the key international sources of corporate
demand has come from the US. This has been driven It may be the case that corporates from India and
by their familiarity with the serviced apartment concept China could become key drivers of the UK serviced
and that they tend to be on longer stays than those apartment market. Yet, it will be those operators with
from Europe (despite this group accounting for the bulk strong international branding and marketing capabilities
of business visitors). But with the slowdown in the US that are best placed to access this demand.
economy will there be implications for serviced
apartment demand here in the UK?
Growth of the sector
The financial services industry both here and in the US So is there room for further growth in the serviced
has seen job cuts since the middle of last year with apartment market? The simple answer is yes,
more expected following the sub-prime housing crash although this will be dependent on enhancing demand,
and subsequent ‘credit crunch’. This need to cut costs particularly for operations outside London.
may mean that US companies will look more closely at
the need to send employees on lengthy secondments In Central London the growth of the sector has been
to the UK. Our forecast for end of year 2007 figures is on the back of the fact that it is a major international
that total number of business visitors from the US will financial centre, with demand coming from international
be down approximately -7%. We expect to see some corporates. This source of demand is limited outside
improvement towards the end of 2008 with 2009 of London and it is this that will limit further growth in
numbers back in line with those seen in 2006 of the sector regionally.
around 980,000.
While traditionally it has been those operators that
have focused on the corporate market that have seen
UK Serviced Apartment Market report 2008 4
Opportunities for growth
the best returns, the ability to access the leisure raise awareness in the general public in order to
market could be a valuable source of future demand. capture potential leisure business. The ability of
But this may be dependent on improved branding and serviced apartments to compete in pricing terms with
marketing coupled with the increased adoption of hotels is a further determining factor in accessing this
tourist board ratings. source of demand.
In terms of corporate demand it is those cities with a While we believe there is room for further expansion,
sizeable financial and business sector that offer the the use of management contracts means that supply
greatest opportunity for further growth. The presence increases will be reliant on developers also coming into
of international corporations will exacerbate this. the sector. Serviced apartments are an attractive
sector for developers wanting to hold onto their product
Birmingham, Edinburgh and Leeds have the largest without having to manage it themselves. Contracting
financial and business services sector (in terms of management out to a recognised operator has the
employment), all of which are forecasted to see benefit of enhancing income returns. It also gives
continued growth. Based on this, and current serviced them the option of selling units back onto the private
apartment supply, it would appear that Edinburgh and residential market at a later date capturing any future
Leeds offer the best opportunity for further expansion. uplift in values.
While both cities have a sizeable financial sector,
current serviced apartment supply is limited when Developers have already recognised it as an attractive
compared to other centres, such as Manchester. option as it is exempt from affordable housing
requirements. But developers should not treat
Supply in Manchester has been driven by the serviced apartments as an after thought based on the
extensive city centre flat development that has taken assumption that it will be easy to get an operator
place over recent years. But its relatively small signed up.
financial and business sector, plus the level of existing
supply, suggests that it may already be well served. Operators will pay close attention to issues such as
Any further expansion will be dependent on the ability licensing, location, unit mix and fit-out, and as a result
of operators to draw demand from leisure guests. so should developers. For example, daily letting
Opportunity for further expansion in Birmingham is licenses are needed in order to operate a residential
limited despite it having the largest financial sector. property as a serviced apartment. These licenses
This is down to its proximity to London and the nature allow units to be let for periods less than, but not more
of its financial sector, which is centred on back office than, three months. A central location is also attractive
functions. to operators as corporate guests prefer to be near to
their place of work. Unit mix is also important. Some
Financial and business services employment operators business models are focused on studios and
one-bed flats as these enjoy higher occupancy rates
compared to larger flats. There will be cases when
2007 2012 2017 2020 these considerations will not be important to operators.
180,000
But on the whole, if developers want to get maximum
160,000 value from their scheme they should be looking to
getting operators on board at an early stage in the
Total employment (forecast)
140,000
development process.
120,000
100,000
80,000
60,000
40,000
20,000
Edinburgh Birmingham Leeds Manchester Bristol Cardiff
Source: Savills
As already highlighted, when it comes to accessing the
leisure market branding will be key. For example, Park
Plaza’s County Hall and One Westminster Bridge in
London with their suite size offering, and branding, will
Park Plaza County Hall, London
appeal to leisure guests. This is likely to put pressure
on the rest of the serviced apartment market.
Operators need to be more pro-active in branding and
UK Serviced Apartment Market report 2008 5
Savills services and contacts
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is prohibited without written permission from Savills Research. February 2008